ATSG Growth Continues As Midsize Freighter Leasing Expands

WILMINGTON, OH, August 7, 2017 - Air Transport Services Group, Inc. (Nasdaq: ATSG), the leading provider of medium wide-body aircraft leasing, air cargo transportation and related services, today reported consolidated financial results for the quarter ended June 30, 2017.

Compared with amounts for the second quarter of 2016 (except as noted):
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Revenues increased $77 million, or 43 percent, to $253.2 million. Excluding revenues from reimbursable airline expenses, revenues increased $60 million, or 37 percent. ATSG's airline services operations, and maintenance and logistics businesses, recorded double-digit revenue increases.
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GAAP Earnings from Continuing Operations were a loss of $53.9 million or $0.91 per share diluted and included charges totaling $67.8 million for the warrants granted last year in connection with operating and lease agreements with Amazon Fulfillment Services, Inc. The value of the warrants increased sharply during the quarter in conjunction with a 36 percent increase in the traded price of ATSG stock since March 31, 2017, resulting in a significant mark-to-market loss for the quarter. Earnings from Continuing Operations were a positive $11.5 million, or $0.12 per share diluted a year earlier.
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Adjusted Earnings from Continuing Operations, which exclude non-cash warrant-related items, were $13.9 million, up 64 percent. Adjusted Earnings Per Share from Continuing Operations were $0.21, up eight cents per share. These Adjusted Earnings and other adjusted amounts referenced below are non-GAAP financial measures, and are reconciled to comparable GAAP results in tables in this release. Adjustments include both dollar-amount and share count items.
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GAAP Pre-tax Earnings from Continuing Operations were a negative $48.4 million, versus a positive $18.8 million a year ago. Adjusted Pre-tax Earnings, which exclude warrant effects along with additional non-cash items, increased 39 percent to $22.7 million.
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Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization, as defined and adjusted in a table later in this release) increased 23 percent to $64.2 million.
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Capital expenditures in the first half of 2017 were $144.3 million, versus $125.1 million in the first half of 2016.
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Share repurchases were $11.2 million for the first half. This includes 380,637 shares ATSG repurchased in June as part of an underwritten secondary offering by an affiliate of Red Mountain Capital Partners.
Joe Hete, President and Chief Executive Officer of ATSG, said, “In addition to the outstanding financial results we are reporting today, I’m pleased to say that we are scheduled to deliver the twentieth leased Boeing 767 freighter to Amazon later this week, 17 months after we formalized our relationship in March 2016. Our total leased-aircraft portfolio has grown by eight 767s as of June 30, compared to the same date a year ago. Excluding the two 767-300s required to complete Amazon's twenty-aircraft order, our current purchase and conversion commitments will yield twelve additional 767-300s extending through the first half of next year. We currently have signed leases or are finalizing others for nine of the twelve aircraft. The remaining three aircraft are under discussion with multiple parties."

ATSG's results for the first half of 2017 included a revenue increase of 39 percent to $491.1 million, and GAAP Earnings from Continuing Operations of negative $44.1 million, or a $0.75 loss per share. First-half Adjusted Earnings From Continuing Operations were $25.1 million, up 48 percent from a year ago. On a per-share adjusted basis, ATSG earned $0.38 per share, up from $0.26 in the first half of 2016.

Segment Results

Cargo Aircraft Management (CAM)

Significant Developments:
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CAM's revenues increased $2.1 million to $49.5 million from the second quarter last year, and included $3.3 million of non-cash amortization associated with the warrant-related Amazon lease incentive. Excluding this lease incentive, CAM’s revenues increased nine percent. CAM was leasing forty-five 767s to external customers as of June 30, 2017, ten more than a year earlier.
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Pre-tax earnings were $12.8 million for the quarter, down $3.4 million. Principal effects were the warrant-related lease incentive, increased depreciation, and higher pre-deployment expenses.
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At June 30, 2017, CAM owned 64 Boeing cargo aircraft, all of which were in service, including fifty-six 767s. Eight other aircraft were awaiting or undergoing modification from passenger to freighter configuration at the end of the quarter, including six 767s and two 737s. In addition to the six 767s in mod, CAM expects to close on purchases of seven additional 767s in the last half of 2017. CAM currently has no 767 purchase commitments in 2018.
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In July, CAM announced long-term dry lease commitments for three 767-300 freighters with Northern Aviation Services, for deployments beginning with the first in October and two during the first quarter of 2018. Some may replace 767 freighters that ATSG's airlines operate for Northern on an ACMI basis.
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Production delays at CAM's freighter modification contractor this year will defer two 767s expected to be deployed in the second half of 2017 into 2018.

ACMI Services

Significant Developments:
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Airline services revenues increased 14 percent to $111.9 million and the segment recorded a pre-tax profit of $0.1 million in the second quarter. The improvement reflects continued growth of CMI operations for Amazon, and reduced pension expense compared with the second quarter last year.

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Costs for pilot training and premium pay for pilots who accept additional flying assignments declined from the first quarter, and heavy maintenance expense was lower than projected for the second quarter.
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Second-quarter block hours increased 29 percent from the year-earlier period. ACMI Services revenues are dependent in part on hours flown as determined by customer network designs, which can change as additional aircraft come on line and networks evolve. Average per-aircraft utilization rates began to decline in late May this year as CMI customers reconfigured their air networks.

Other Activities

Significant Developments:
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Total revenues from all other activities in the second quarter more than doubled from a year ago to $116.5 million. External customer revenues increased $43.3 million, to $76.3 million. External maintenance revenues and those from parcel handling and logistical support services increased substantially during the quarter. PEMCO, acquired in December 2016, accounted for $21.1 million of external revenues during quarter.
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Second-quarter pre-tax earnings of $6.5 million increased 58 percent, reflecting improved results from heavy maintenance and logistics services.
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As announced this morning, ATSG completed a joint-venture agreement with Precision Aircraft Solutions, LLC, to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. The venture anticipates approval of a supplemental type certificate in 2019.

Outlook
ATSG expects that its Adjusted EBITDA from Continuing Operations for 2017 will be approximately $260 million, including a projected 28 percent increase in the second half compared with the prior-year period.
Principal factors affecting our 2017 second-half guidance include:
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Seven additional freighters will be dry leased in the second half, including five 767s and two 737s. Production delays to complete aircraft cargo modifications have deferred delivery of two 767s from the second half to 2018, reducing Adjusted EBITDA from continuing operations by between $2.0 to $2.5 million in the second half.
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A new contract for engine overhauls on General Electric-powered 767-300 aircraft with Delta TechOps will result in $3.0 to $4.0 million in additional maintenance expense for the second half of 2017, with a corresponding decrease in Adjusted EBITDA. The payments to Delta are now recorded as maintenance expense as engine cycles occur, and will yield cash flow savings compared with the prior arrangement. Previously, overhaul events for these engines were capitalized and depreciated.
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Recent changes by CMI customers to their air networks, which have reduced average utilization and associated variable revenue compared with previous run-rates.

ATSG projects 2017 capital expenditures of approximately $335 million, mostly for purchase and freighter modification of passenger aircraft. The reduction in guidance for capex of $20 million compared to the $355 million projection provided in May is due to production delays in the passenger-to-freighter conversion lines for Boeing 767 aircraft, and lower maintenance capex associated with the new Delta engine contract.

"Following a great first half, our outlook for the last six months of 2017 remains positive as we complete the Amazon deployments and lease more freighters to other customers," Hete said. "Our operational flexibility and broad service offerings keep us well positioned to support customers' long-term and peak shipping season requirements."